Time Warner Cable Would Gain in Charter Merger, Says Morgan Stanley

NEW YORK ( TheStreet) - Time Warner Cable ( TWC) stands to benefit from a merger with Charter Communications ( CHTR) said Morgan Stanley ( MS) in a report today, citing the possibility of eliminating overlapping costs while leveraging a larger national reach.

Speculation of a possible acquisition of Time Warner Cable by Charter Communications emerged after John Malone, Chairman of Liberty Media, stated at a June 7th shareholder's meeting, that the firm's strong balance sheet and stock valuation would allow it to be a "horizontal acquisition machine looking at other assets in the U.S. cable business."

With programming costs rising, and the need to update systems to compete with the quicker and newer internet networks that Verizon ( VZ) and Google ( GOOG) have implemented with Fios and Google Fiber, established cable companies have started to think about consolidating to garner the necessary capital.

The merger would create a new company with 15 million video subscribers. This hypothetical firm would have the third largest pay-TV viewership and the second largest broadband network in the United States. "Scale could help moderate programming costs and grow the commercial telecom business more rapidly" wrote the Morgan Stanley analysts.

Another benefit of a similar acquisition would be increased tax efficiency. Time Warner faces rising cash taxes in the future. The analysts speculate that Charter Communications Net Operating Losses could possibly act as a tax shield but its extent is not able to be determined at the moment.

Stamford, Conn.-based Charter holds the fourth-largest market capitalization in the U.S. cable industry at $11.9 billion following Comcast ( CMCSA), DirecTV ( DTV) and Time Warner Cable. The company operates in the South, while Time Warner largely services the East Coast.